ACKNOWLEDGMENTSThanks go to Zoë Markham for the fast turnaroundon the editing of this project, and to Kolin Burgesand Jon Southurst for the permission to use thephoto on the cover of this book..

iv

INTRODUCTIONI wanted to know how Japanese law relates tobitcoin exchanges like MtGox, and to the Bitcoinnetwork in general. The best way for me to find outwas to write this short book.I am not going to explain here what Bitcoinis . Or who MtGox is2. This book is for people whoalready know that much.1

Why would I be interested in such a question?By a weird coincidence, I was involved in

some of the protests going on at the MtGox office inJanuary and February 2014. Two threads on Redditabout these protests got quite a lot of attention andcomments.One of them was about a guy from Australiawho flew in spending more than 16 hours on the roadjust to talk to someone from MtGox in person. I havetalked to him and know his name, but I won'tmention it here, since he asked me not to disclosethat particular detail.See the "Bitcoin" Wikipedia article at en.wikipedia.org/wiki/Bitcoin.2 See the "MtGox" Wikipedia article at en.wikipedia.org/wiki/MtGox.1

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He posted a report about his adventure onReddit in this thread.3 Which got a score of over 1300upvotes and over 600 comments.As I mentioned in that thread4, I was walkingfrom my university over to the weekly Bitcoin Meetupin Shibuya. Since the MtGox office is located on myway there, I happened to notice this protesterstanding there with a sign. I thought he might beinterested in joining the Meetup, so I approached himand told him that there was a Bitcoin Meetupscheduled close by. And asked if he would beinterested in attending.He was. So we walked over there together anddiscussed his protest on the way.After he returned to Australia, a second guycame over from London the next week. He had seenmy post at Reddit and contacted me. We ended uphaving lunch together, joined by a journalist from theWall Street Journal.He succeeded in confronting the CEO ofMtGox, Mark Karpeles, and getting thatconfrontation on video 5 . The Wall Street Journal

k-lenz.de/btc001.k-lenz.de/btc002.5 k-lenz.de/btc003.34

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reported on the protest6. Coindesk reported as well7.The picture on the cover of this book is ofhim standing in a snowstorm protesting.I met some other people involved as well. SoI got a pretty good picture of what was going on.Very briefly: The MtGox exchange hadsuspended withdrawals of bitcoins, allegedly for atechnical reason. They had already just about stoppedwithdrawals of actual money before. And on top ofthat, they were stonewalling people.There was no actual money coming out, nobitcoins coming out, and no information coming out.And then they moved out of their office spaceand gave a "virtual office" address instead.I wonder what the Japanese Prime Ministerwould do with a bank that suspended withdrawals ofactual money because they couldn't be bothered tokeep their computer code up to date. And that on topof that refused to talk to journalists, refused to talk tolarge depositors, and did not disclose their financialstatements. And on top of that closed all of theirbranches to hide behind a post box virtual officeaddress. No one would know about the financial67

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health of such a bank.Might the Prime Minister be inclined torevoke the license of such a bank?Might he be inclined to do so if he saw pressreports of people flying in from overseas to protestthe sorry state of Japanese banking regulation?Might he want to revoke the banking licenseof MtGox?Wait a minute.It's impossible to revoke the banking licenseof MtGox. They don't have one in the first place.It's also impossible to damage their reputationas an honest bitcoin exchange at this point (23February 2014). They don't have any such reputationleft in the first place. And actually, a couple of daysafter I wrote the sentence above, MtGox announcedthat they had lost hundreds of millions of dollars inbitcoins to "hackers" and that they are filing for "civilrehabilitation".So that leads to the interesting question:Would MtGox have needed a banking license forwhat they were doing?I am going to spend some time in the firstchapter discussing exactly that question in some detail.4

Japanese Bitcoin Law

But this book is only partly about the MtGoxproblem. They may get shut down by the Japaneseregulators. Mark Karpeles may be prosecuted incriminal court for violation of the Japanese BankingAct or other relevant statutes.I don't care either way if that happens. What Icare about is finding out what the law says right nowin Japan.One motive for this is that eventually peoplewill want to set up other bitcoin exchanges in Japan.They will need to know what the legal requirementsfor such an exchange are.One other motive is the simple fact that Ienjoy researching and writing about law.And bitcoin (the unit of currency) and Bitcoin(the network and the protocol) are a major innovation,comparable to the personal computer and theInternet.A note on spelling. In this book, I consistentlyuse the spelling "Bitcoin" (capital B) when talkingabout the Bitcoin network or the Bitcoin protocol, orother parts of the Bitcoin infrastructure like miners,payment processors, or online wallets. In contrast, Iuse the spelling "bitcoin" (small b) when talking aboutthe units of currency allowed on that network.5

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I think this difference is important. Oneanalogy would be services like Twitter or Youtubeand the Internet. The Internet is the protocol and thenetwork, and Twitter and Youtube are built on top ofit. In the same way, bitcoins move over the Bitcoinnetwork.This is, in my opinion, the way to give anobjective value for individual bitcoins. That valuedepends on the strength of the underlyinginfrastructure. And of course on the number of users(network effect). Both of these are growingexponentially, which means that eventually the priceof individual bitcoins will do so as well. It has grownin average by a factor of 10 each year for the pastcouple of years, and as long as the exponential growthof the Bitcoin network keeps up, that growth willcontinue for another couple of years.

Before starting, I need to write a couple oflines of disclosure.I am personally a customer of MtGox, withabout half a bitcoin and some small change stuck atthe exchange at the time of this writing. That means Ido have a small amount of money at stake personallyhere. But I think it is safe to say that this does notinfluence my judgment in any way.6

Japanese Bitcoin Law

I also had the pleasure of talking to all threepeople protesting at the MtGox office directly. Part ofmy motivation comes from a desire to make sure thiskind of thing doesn't become necessary again.In contrast, I have attempted repeatedly totalk to MtGox, but have had no success. They areignoring me, just like most everyone else.I have been offered a consulting fee fordiscussing legal questions with one individual. I havenot accepted that, nor have I accepted any consultingfee from anyone else in this matter, and I have noplans to do so in the future. I am writing this only as apublic service. And, of course, because I think thatthis is a fascinating topic.So let's get on with this show.

7

CHAPTER 1: GENERAL ISSUES

I.

Bitcoin and Law

Some people involved with the Bitcoinprotocol have a low opinion of law and government.They like the peer-to-peer nature of Bitcoin. Somehave high hopes that the Bitcoin network will get ridof governments and laws altogether.For example, Roger Ver donated in 2013bitcoins worth more than one million dollars at thetime to an organization. He talks about that donationin a Youtube video released in November 2013 8. Hedonated the money to the FEE (Foundation forEconomic Education) 9 , citing their work inpromoting the work of "intellectual giants" likeMurray Rothbard10.Looking at the Wikipedia article on thisintellectual giant, I find he advocated for ideas like"selling rights to children in a free market" (e.g.treating your child as an object of property, a slave),"enslavement of thieves to the victim", and "torturingk-lenz.de/btc053.www.fee.org/.10 en.wikipedia.org/wiki/Murray_Rothbard.89

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suspects of crime".I think it is safe to say that all of these ideasare fringe minority loser positions in all civilizedcountries. They are incompatible with basic humanrights guarantees as well. Any country in the EUadopting any of these proposals would find itselfbooted out of the European Union for human rightsviolations, as well it should.In contrast, these ideas of rejectinggovernment and law are not fringe minority loserpositions when one restricts the voters to peoplealready using bitcoins and advocating for the Bitcoinprotocol. If one reads the Bitcoin discussions atReddit, there are quite a lot of people who wouldsupport positions close to Roger Ver.I think this is a problem. I want the Bitcoinprotocol to be as successful as the Internet. I want itto go mainstream. That's impossible if it is joined atthe hip with fringe minority loser political positions.Fortunately, the Bitcoin protocol as such iscompletely neutral on these questions. Nothing in theprotocol requires supporting slavery and torture.And fortunately, the more extreme"libertarian11" Bitcoin supporters are more and more11

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crowded out by investors from Wall Street. It is truethat in the early days of the Bitcoin protocol, when10,000 bitcoins would only buy you two pizzas, thisfringe loser minority position had a strong influence.But this naturally changes as a larger part of thepopulation starts using bitcoins. You can't expect toget Bitcoin mainstream and still keep a majority foryour positions that are in a minority within thegeneral population.It is still true that getting the Bitcoin networkto mainstream will, all things remaining equal, lead toa massive gain in economic freedom from regulation.The Internet has made it possible foreveryone to post videos to Youtube, like the video byRoger Ver I mentioned above. Before the Internet,you needed to be working for a television station todo that. Now everybody has that power.The Internet has made it possible foreveryone to write a novel and have it published atCreatespace the next day. Before the Internet, youneeded to write hundreds of query letters topublishers to get your novel out. Even Rowling's first"Harry Potter" book was rejected repeatedly. Now,those days are gone. Authors that are independentfrom legacy publishers are starting to make money

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from their efforts12.The Internet has made it possible foreveryone to publish their opinion on a blog. Beforethe Internet, you needed to work at a newspaper toget the chance to reach an audience with your writtenarticles.All these examples show that the Internet wasa great leap ahead for the freedom of speech. That'sbecause the Internet is much more effective, andtherefore much cheaper to use, than traditional media.In exactly the same way, the Bitcoin protocolis much more effective, and therefore much cheaperto use, than the traditional financial system. And itwill lead to much more economic freedom foreveryone on the planet once it becomes mainstream.I am happy about that. While I don't agreewith the more radical "libertarian" ideas, I agree withthe idea that law and regulations should respect theliberty of individuals. Actually, human rightsprotecting economic freedoms, like the freedom tochoose one's profession or the guarantee of propertyagainst state expropriation, will be enhanced by theBitcoin protocol, just like the Internet has enhancedfreedom of speech.

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See this survey at authorearnings.com k-lenz.de/btc054.11

Karl-Friedrich Lenz

But getting Bitcoin to mainstream willcertainly not mean getting rid of governments andlaws altogether. Thinking otherwise is similar to theillusion some people twenty years ago had that theInternet would get rid of governments and laws.Actually, even if you happen to think thatgovernments and laws should not exist, as a matter offact, they do. And governments will enforce their lawseven against people who don't like that fact.For example, the position of rejecting allStates and all laws obviously means opposing lawsagainst producing, distributing, and possessing childporn. If there is no State and no law, obviously therewill be no law against child porn either. But theexpectation that the Internet would lead to a childporn producer's paradise where these laws suddenlydisappear or lose all their effectiveness has notmaterialized. The FBI knows a thing or two abouthow to break tools like the Tor network. They justdid so13 by distributing malware on some child porndarknet websites.So even if you are some kind of anarchist, atleast as long as the Bitcoin network has not yetsucceeded in its mission to get rid of governmentsKashmir Hill, The Tech War On Child Porn Is NotLimited To Google Scanning Gmail, August 5 2014 blog post,k-lenz.de/btc104.13

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and laws, you would be well advised to find out whatthe law says about Bitcoin.Right now, in most jurisdictions, there is nospecific Bitcoin law. Just as around 1995 there was nospecific Internet law. That will change. Eventuallypoliticians are going to figure out what a revolutionarynew technology Bitcoin is. It is, put very briefly,adding the ability to make payments to the peer-topeer Internet. Of course there will be Bitcoin specificregulation eventually, just as there was Internetspecific regulation eventually.But until that happens, existing laws will beapplied to the Bitcoin network. If someone steals apaper wallet, he will be accused and sentenced fortheft. There is no need for a new statute in that case.If someone does not steal the paper wallet, but takes apicture of the private key with his mobile phoneinstead, that's a case where one would need to discussif the existing theft statute applies. I will do so below.But anyway, existing laws apply to the Bitcoinnetwork even if they were not enacted with thatnetwork in mind.To conclude this rather abstract section, let'sdiscuss one very controversial point.I have made a so called "vanity address". Thataddress is published on my blog. It starts with the13

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string 1KfLenzKgDW". I have done this for severalreasons.One is that this gives me the ability to use thisBitcoin address as a means of signing an onlineversion of one of my books. I can create a virtualautograph. I posted in some detail 14 about thisparticular idea on my blog last year.A big company like Coca-Cola might want tohave a Bitcoin address in the format "1CocaCoLa".Or maybe add something like "777" for"1CocaCoLa777" (a long vanity address that requiresconsiderable resources to find).If it is known and easily proved to anyonecaring to check that this address is indeed owned byCoca-Cola, then any payments to that address comewith an instant receipt incorporated in the blockchain.And it would be close to impossible to divert anyBitcoin payment to some other address, since findinganother address with the correct format would bevery expensive, which would be enough to discourageanybody from trying this for amounts worth less thanis necessary to find such an address.All these use cases require that the holder ofthe Bitcoin address in question not only does notmind having his name attached, but actually actively14

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wants that.That of course is sacrilege to libertarianpurists who require that all Bitcoin transactionsshould be anonymous.Well, too bad for them. If I choose to attachmy name to a Bitcoin address, who are they to tell meI am not allowed to do that? I am not telling them toattach their names, if they don't want to. And moreimportantly, what exactly in the Bitcoin protocolstops people from registering their addresses andmaking such registration public, just as one wouldmake a PGP key public?As far as I know (I am far from an expert onthe technical details of the protocol), the answer tothat question is: Nothing.Like many others I think that there are onlytwo possibilities for the future of the Bitcoin protocol.Either it fails completely, reducing the value of allbitcoin units on the network to zero. Or it becomesmainstream, which would imply a value of individualbitcoins at least 100 times higher than in March 2014,the time of this writing.And there are not many existential risks thatcould lead to the first outcome (Bitcoin failingcompletely). Someone could find an attack against theunderlying cryptography. That has not happened for15

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the last couple of years. And it is probably difficult topull off. But that does not mean it is impossible. Ifthat happens, then it's back to the drawing board forcryptocurrencies, though it may be possible to adoptthe protocol so as to make it resilient to such anattack for the future.More likely is the risk that governments worldwide decide that they want to completely ban Bitcoin.Some of the anarchist libertarian Bitcoinsupporters think that would not matter. They thinkthat governments lack the ability to regulate theBitcoin network even if they tried to.My answer to that position is that the onlyway to find out is to see governments try. I don'twant to see that.If governments world wide wanted to shut theBitcoin network down, here is what their policywould be. Make it illegal to run a bitcoin exchange(easily enforced). Make it illegal to take bitcoins aspayment in any business (easily enforced). Make itillegal to publish any research or opinion about theBitcoin network anywhere (easily enforced in manycircumstances). Make it illegal to run a Bitcoin node(easily enforced, you can't run nodes completelyanonymous, since traffic needs to reach yousomehow). Make it illegal to keep or update a copy of16

Japanese Bitcoin Law

the blockchain. Make it illegal to own bitcoins or totransfer them to someone else. Extend theserestrictions to all cryptocurrencies, even to Dogecoin.If that happens, the Bitcoin protocol may benot completely eradicated. But it would, by definition,be a network used only by criminals. It certainlywould never get as mainstream as the Internet is now.So I for one would be cautious about thinkingthat governments can't regulate Bitcoin. They mostcertainly can, and many of the things they could dowould have a big impact.Most of this book is about looking at existinglaw as it relates to the Bitcoin network, with a focuson Japanese law. Obviously I can't write about thenew Japanese Bitcoin Basic Act of 2017 right now(again, in March 2014), though I did write a booktitled "Zukünftiges Recht" (Future Law)15 long ago.But for the end of this section, one morethought about how Bitcoin regulation might look tenyears from now. This is something I wrote on myblog last year, and I am going to just repost it here.The title of that post16 was "Black Bitcoins and WhiteBitcoins". Here it is:Karl-Friedrich Lenz, Zukünfiges Recht, k.lenz.name/d/v/zukunft.pdf.16 k-lenz.de/btc055.15

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Some of the important differences betweenBitcoin and cash are that all transactions are recorded,all transaction records are kept for eternity, and alltransaction records can be seen by anyone.The NSA probably has a copy of theblockchain somewhere.This makes the Bitcoin network actually muchless attractive for money laundering purposes thanboth cash and bank transfers. From the point of viewof the criminal, the above characteristics are highlyundesirable.While it is true that people can use the Bitcoinnetwork anonymously if they know what they'redoing, it is also true that many criminals are stupid.The government may have undercover agentsinfiltrating money laundering networks. One falsemove can be enough to tie an address to a real person.Anyway, for the reasons above I think itwould be not appropriate to outlaw the Bitcoinnetwork. For those who insist that can't be doneanyway, you are wrong. States can outlaw bitcoinsmining (they are already outlawing printing traditionalmoney). They can outlaw running an exchange. Theycan outlaw accepting bitcoins as a payment for alegitimate Internet business. They could even make ita crime holding bitcoins.18

Japanese Bitcoin Law

If you want the Bitcoin network to succeed,you don't want any of the above to happen in anycountry.But it may well happen. People who stand tolose from the Bitcoin network's success may arguethat Bitcoin is an evil instrument of money laundering.The point of this post is to show that even ifthat discussion starts in some country or other, thereare three possible outcomes. Not two.Obviously, one can leave it at the present stateof affairs, where the Bitcoin network is not illegal(though exchanges might need some license or otheralready under existing law in some jurisdictions).Obviously, one could imagine a country goingall out in a fight against the Bitcoin network andadopt all of the possible measures discussed above.But there is a third possibility. One couldmake black bitcoins illegal and leave white bitcoinsuntouched.That, of course, would need a definition. I'llprovide it right now.A white bitcoin would be one tied to a realperson. For example, I use the address"1KfLenzKgDW...". I display that fact on this blog. I19

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want it to be public knowledge, for various reasons.Obviously there are other addresses where theholder of the address is known to the public.So any bitcoins on this address would be"white" under my definition. That's because thisaddress is completely unsuited for use in any moneylaundering scheme. The three differences between theBitcoin network and cash I mentioned at thebeginning make any transactions involving thisaddress traceable for anybody, including lawenforcement.On the other hand, Bitcoin addresses that arenot linked to any real person would be "black" undermy definition. They pose some problems with moneylaundering. People can move funds with themwithout attaching their real identities. This is notpossible with bank accounts, since under therecommendations of the Financial Action Task Forceanonymous bank accounts are not allowed.The third alternative of allowing only "whitebitcoins" would be the equivalent of allowing onlybank accounts with real names attached. It would beless restrictive than the second alternative mentionedabove, which would ban the white coins with theblack coins.If you want the Bitcoin network to succeed,20

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you should hope that there is a large amount of whitebitcoins in usage, and that criminals are only a smallpercentage of the whole user base.Just to be clear, using an address withoutattaching a name can have legitimate reasons ofprivacy protection. I'm all for privacy protection. Butthat does not mean you need to keep all paymentsanonymous. For most payments, no one cares eitherway.And anyway, this post is not so much aboutdiscussing whether a law against the Bitcoin networkrestricted only to black bitcoins would be desirable ornot. The main point was to show that there areactually three possible outcomes. Not two. Three.

II.

Japanese Policy Discussions

The MtGox insolvency has been big news inJapan. As a result, Japanese politicians are starting todiscuss Bitcoin regulation.These discussions are still only beginning. It istoo early to report on any results. And they are verymuch a moving target, which makes them not verysuitable to discuss in a book like this one. Reportingon the latest events in that discussion is better suitedto blog posts.21